Market headlines aren’t exactly looking cheerful these days, leading some to worry that another collapse could be on the horizon.
How can your account survive if this happens? Here are five tips to keep in mind:
1. Be rational
This is simply a more positive way of saying “Don’t panic!”
It can certainly be alarming to see market heat maps flashing red, so you need to remind yourself to stay calm and focus your energy on looking for profit opportunities.
Of course, this is easier said than done. Not everyone can remain calm and collected when watching their wallet bleeding.
Take a deep breath and a few minutes to answer questions like these before taking any action in the heat of the moment:
- Are there any changes in fundamentals that indicate it is better to cut losses?
- Has market sentiment turned against your trading?
- Is the asset still trading within its usual volatility range?
2. Don’t be greedy
On the other hand, let’s say you are able to count on big market movements and make the weather rainy.
Should you continue to press your advantage?
Under normal circumstances, probably. But during a market crash, you may want to consider playing it safe.
As you can see, investors are very moody and sensitive at such times, so risk appetite can change quickly.
Even the slightest whiff of a rebound or positive development can lead to a sudden rally… before gains fall sharply later.
If you are really looking for good gains from a particular setup, you may be better off taking profits. All you have to do is finish the day (with bird in hand), especially if you can’t keep your eyes on the charts for long.
Either that or adjust your stops to lock in some gains or close part of your position just in case the market swings significantly against you at some point.
3. Be aware of leverage
Leverage is a double-edged sword, which means you could end up destroying your portfolio if you don’t use it correctly.
While leverage gives you the ability to trade positions larger than your balance, it can also result in your entire account being closed if the price moves against your trade.
As we mentioned briefly earlier, asset prices tend to rise when investors feel stressed.
Even though your analysis is accurate and you got the overall trend right, you could still end up getting a scary margin call just because Mr. Market has bad mood swings.
4. Look into other asset classes
Trading during a market crash is not as simple as selling everything.
Some markets don’t even allow short selling, while others have circuit breakers that prevent prices from falling any lower.
If you decide to stay out of the markets during a sharp sell-off, you can use the time to learn about other asset classes and financial instruments that can provide better profit opportunities.
If you are already involved in other markets, you may also consider rebalancing your investment portfolio to account for changing risk levels in stocks, commodities or bonds.
5. Learn from previous market crashes
Finally, reviewing the performance of markets during previous recessions would also give valuable insights into how to manage ups and downs.
For example, recalling that the stock market crash of 1929 sent stocks down nearly 90% over three years would bring some perspective to the highs and lows.
Discovering the similarities and differences between these market incidents can help you stay alert to patterns that could emerge again and remind you to always keep your guard up.